This week should see the markets move higher as we head into an F&O (futures & options) expiry week with the bears being forced to cover and the liquidity surge urging bulls to take centre stage.

The benchmark indices rose to 14 month highs last week.

The bulls made a roaring comeback after Reserve Bank of I India cut the Cash Reserve Ratio (CRR) by 25 bps. The other big contributor was the Congress standing by its reform measures despite Trinamool Congress, a key ally, pulling out of the UPA government. Further, the Finance Minister went ahead with more key reforms such as tax relief for equity investments.

This week could also see further reforms, such as a hike in sugar prices, foreign direct investment in insurance and restructuring of state electricity boards, being announced.

Although the measures announced were token in nature and it may take some time before investments pour in, the sentiment change took everyone by surprise and markets surged on strong buying by foreign institutional investors. The past week, FIIs equity buying amounted to Rs 3,405 crore, which takes the year to date tally to over $ 12 billion.

Last week’s bold decisions by the government drew huge applause from investors -- both domestic and overseas – and corporates. This will also be viewed positively by most rating agencies that are constantly monitoring the fiscal deficit situation in India.

Among 13 sectoral indices, eight closed the week on a positive note. The biggest gainers were realty (up 8.84 per cent), Bankex (6.96 per cent) and capital goods (6.88 per cent). The biggest losers were IT (down 3.56 per cent), healthcare (2.18 per cent) and FMCG (2.05 per cent).

The return of high beta was evident at the cost of defensives. The same may continue this week as the “return of risk-on trade” will see banks, infrastructure, metals and capital goods outperform other sectors.

With sentiment improving, fund raising will become easier for corporates and will end the drought in the capital markets. The government will be able to kick off the divestment process which has been in the deep freezer for long.

On Friday, the government reduced the withholding tax on overseas corporate borrowings to 5 per cent, thus making it easy for them attract overseas funds. The wheels of the economy will start moving with new infrastructure projects and banks will breathe easy as potential non-performing assets in infrastructure, power, telecom and aviation could turn around.

Technically, the Nifty will now face resistance at 5,780/5,800 levels and find support at 5,600.The high beta ‘Bank Nifty’ will now find resistance at 11,700 and support at 11,300.Volatility should be on the higher side as expiry of the F&O series will take place this Thursday.

The sharp upsurge also increases the chances of market corrections as global and local macro data continue to be weak.